An extremist, not a fanatic

July 12, 2012

Crony capitalism - the only capitalism

Supporters of free markets seem to be increasingly vocal in their opposition to corporatism or crony capitalism. Whilst I wholly welcome this, I fear that the demand for a proper free market economy without cronyism or special favours is as unachievably utopian as the wildest leftist fantasy.

I say this because of the first premise of free market economics - that incentives matter. Politicians want money, business wants influence and favours. Both sides therefore have powerful incentives to trade - to give us cronyism.

Of course, this wouldn't be a problem if there were, as Sandel and Walzer have argued, moral limits upon markets - an agreement that there should be some things, such as political power, that money shouldn't buy.But this ethical demand runs into the fact pointed out by Marx - that the logic of capitalism is commodification, the extension of the cash nexus:

The bourgeoisie...has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment”...It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom — Free Trade.

There's another reason why crony capitalism will always exist. As Arnold Kling says, there will always seem to be a good argument for regulation. And thanks to regulatory capture, an inevitable by-product of this will be that regulation will favour big business; this fact is now so obvious that it even Liberal Conspiracy and a Very British Dude agree upon it. The only way to avoid cronyism is to avoid regulation - and nobody wants this.

There's a third point, which I think is under-appreciated. To survive - let alone thrive - in a proper market economy requires great entrepreneurial skill, to be flexible, efficient and genuinely "customer-focused". But these skills are very scarce. In a true market economy, therefore, not only would entire industries such as banks and arms companies not exist in their current forms, but nor would many firms, such as G4S, A4E or Atos. State support for business is necessary to sustain demand for the vast supply of incompetents and fraudsters.A free market economy would be one in which many people are unemployable.

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Good post. It's a question of degree though. There will always be elements of cronyism in capitalism, and the degree will go in cycles. Good education (which you are assisting with) is needed to curtail this particular huge cycle.

Also, I can't think of a system other than capitalism that has less cronyism on average than capitalism does.

You could say the same about crony socialism though, could you not? Politicians will presumably be just as power hungry, and so will conspire with one social group or another to increase their power, no matter the system.

Perhaps a more free market system could be set up under an enlightened monarch, since the monarch would presumably have an interest in increasing the value of their property.

I followed the logic until the conclusion, when the citations stop and the assertions start.

"But these skills are very scarce"

Are they? Says who? Might be right or wrong, but the existence of four million British businesses (most of which, admittedly, are micro) points to widespread entrepreneurial culture.

"In a true market economy, therefore, not only would entire industries such as banks and arms companies not exist in their current forms, but nor would many firms, such as G4S, A4E or Atos"

Why would they not exist similar to now - just a bit better? Would retail banking be redundant? Would investment banking not be needed (M&A advice not needed for some reason, or wheat derivatives superfluous?).

"A free market economy would be one in which many people are unemployable"

Why do you assume that the competent bosses in an economy can't grow firms fast enough to provide jobs for the incompetents? You are relying on your unsupported assertion that competent capitalists are "scarce".

Crony capitalism may often result in productive, job-creating firms being obstructed by badly run firms with sinecures (critics of A4E may point to this firm as an example). That leads to more unemployed people, not fewer.

There is a strong note of Bastiat's broken window fallacy at work here: assuming that the jobs created by crony capitalism, paid for by genuinely productive firms, are a net gain. If that were so the state should expand wildly, taxing higher and creating more crony sinecures - a form of economic perpetual motion.

Good post, but I definitely agree with Frank. The degree matters (http://bit.ly/NjQxeJ). I believe most debates about free market versus regulation are ultimately about reducing the degree of cronyism within society.

@ charles - I take your point, if we're thinking very long-term. It could be that crony capitalism/statism crates a culture which encourages rent-seeking and other anti-market skills, and that if we had a more free market society and culture, then market skills would be cultivated. However, it doesn't follow that a sudden shift from cronyism to freeish markets would swiftly create market skills. We're talking many years/generations here.
@ Frank, woj - yes, of course it's a matter of degree. My point is simply that there are powerful mechanisms pushing us along the spectrum towards cronyism. The questions are: what offsetting mechanisms are there? Which ones might reasonably be created?

"Cronyism" is a pejorative term, but what if we think about it more neutrally as a strategy to mitigate the problematic consequences of the free market, a la Polanyi?

Though public debate is currently centred on the greater cronyism, it might perhaps be wise not to forget the lesser varieties. We can all agree that corrupt allocation of government contracts is bad, but what about covering up for a co-worker to ensure he doesn't lose his job, or putting in a good word for someone's daughter when a vacancy comes up?

"A free market economy would be one in which many people are unemployable". Quite. But that includes many otherwise blameless individuals in humdrum jobs. Bob Diamond may be an executive looter who deserves to be run out of town, but a truly free market-run bank would also lose most of its HR staff (all nice people, no doubt).

The big money from cronyism may be found in the executive suite, but the largest group of beneficiaries by population are middle-class white-collar workers and professionals.

I'd agree that the only way to avoid crony capitilism is to avoid regulation, but would also suggest that it could be a matter of degree, the less scope there is for regulation in a society the less scope there is for corruption/cronyism- if free people are free to trade and interact with each other on their own terms, without the need for permission from the state or a regulator then there is no scope for corruption as their is no one to bribe. As P J O Rouke said "When buying and selling are controlled by legislation, the first things to be bought and sold are legislators."

If as seems to be the case in this country at the moment the regulator/politicians have all the say as to how a firm can do buisiness or even whether or not a firm can operate in a given market, then the best way to maximise profits is often to run the firm to please the regulator or try to "buy" the politician to ensure that your firm has a competative advantage/increase barriers of entry into your industry to avoid competition from upstart new companies. Regulation does not tend to be anti established companies it's biggest affects are on new entrants to a market place.

If there were less regulation it's likley that the incnentive would still be to maximise profits, but the best means of doing this would be to please the customer not the regulator.

The only reason you give for that conclusion is that people will not allow corporations to exist without regulating them. What evidence do you have for this claim? The USA survived for a century with almost no regulations of corporations, businesses, or workplaces. I easily can envision a small government nation that allows its informed citizenry to "regulate" businesses through market actions such as not buying goods or services from businesses that pollute heavily.

Well put. I was an early supporter and coitnrbutor to the Obama campaign also, but have come to the same concluisions. Is there any way to change things short of a revolution? As you can see from the above comments, we continue to get bogged down in ideological attacks or bias questioning when neither of the two major parties is really any different on issues related to money influencing policy and neither deserves our support.Could there possibly be enough support generated in 2012 for Jill Stein and the Green Party by the Occupy Movement and others to win an election? Given the history of being stuck with old allegiances to the two-party system I have my doubts. There are probably too many who think we are not able to make a break from old ways of doing business, exploiting labor and natural resources, poluting the environment, and the like, to support a Green Party candidate but there are still 10 months left!

What Maloney left out, of course, is that I inwtrvieeed Rangel about 10 minutes before he was due to step in front of a batch of Washington reporters at a press conference he'd called that was carried live on cable TV. My talk with him was to get a sense of his his mood and have him lay out his view about what was likely to happen, in keeping with the ground rules I'd arranged with his staff minutes before we went on the air.Needless to say, I would have explained this to Brian Maloney if he had contacted me before publishing his ritualistic hit job. Very ethical, Brian.

Are you kidding me? Both Republicans and Democrats renuitoly practice crony capitalism to the point where the relationship between money and politics can only be described as fatalistically incestuous. This corruption of the Spoils System is almost as old as the Republic. To paint the Republicans as the knights in white armor while failing to look at the failings of both parties is laughable.

Dean, thanks for the link. The left keeps hiaprng on the influence of money in politics, then they vote in favor of laws that provide incentives for corporations and unions to spend money to influence elections.

Ravi,I absolutely agree that human begnis are flawed and depraved, but I don't think that leads to their being no difference between capitalism and communism. Countries which have embraced capitalism have seen much more prosperity than countries with centrally planned economies. A great example of this is China. Certainly China's flavor of capitalism is flawed, but China has seen amazing improvements in their standard of living in the last thirty years ever since they transitioned from their command economy to their price driven economy.Economic policies have huge effects on the prosperity of people, all people.